tag:blogger.com,1999:blog-2499715909956774229.post7256938357427398824..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: More on Unconventional Open Market OperationsStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger49125tag:blogger.com,1999:blog-2499715909956774229.post-51852987467050982132012-06-10T09:03:16.476-07:002012-06-10T09:03:16.476-07:00Thanks for this post, it was well written. Questi...Thanks for this post, it was well written. Question about the aribtrage. An SPV holding even T-bonds will have some haircut, i.e. the repos will be less than 100% of the assets. So the Fed's action can be thought of as unwinding the repo, but it also seems to change the nature of the equity sliver of T-bonds by essentially undwinding the leverage. This still changes the overall portfolio of the private sector by reducing its risk, particular its term premium risk. <br /><br />Or are you arguing that playing with the term structure won't matter because it simply transfers the term premium to the government? But isn't that the point? That is, if the government increases the risk of safe nominal assets it might be just as effective as increasing the supply of safe assets in raising the price level.emuhdnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55990807698058673462012-06-08T21:38:53.894-07:002012-06-08T21:38:53.894-07:00Brad DeLong has an interesting and semi-plausible ...Brad DeLong has an interesting and semi-plausible explanation for Wallace neutrality, see:<br /><br />http://delong.typepad.com/sdj/2012/06/a-fragment-on-the-interaction-of-expansionary-monetary-and-fiscal-policy-at-the-zero-nominal-lower-bound-to-interest-rates.html <br /><br />But, look in the comments; he agrees with me that investor heterogeneity can make QE have an effect, "Yes, investor heterogeneity breaks it."<br /><br />What do you think?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91346012367248118012012-06-08T12:56:14.823-07:002012-06-08T12:56:14.823-07:00On the first point, isn't the essentially what...On the first point, isn't the essentially what is happening? We're running deficits and the Fed is buying some of the bonds that finance that. Or did you mean that the Fed portion doesn't matter at all, just the spending?<br /><br />On the second point, I know you've been trying to explain it, but I really don't understand how that can be. If the Fed is buying gold in large quantities, what's the offsetting action that keeps the price of gold the same?Adamhttps://www.blogger.com/profile/00848821084269314215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35812799399729192942012-06-08T12:17:18.430-07:002012-06-08T12:17:18.430-07:00Does it matter whether it's the assets purchas...Does it matter whether it's the assets purchases or the signal that works?Adamhttps://www.blogger.com/profile/00848821084269314215noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-85766029477988287162012-06-08T07:45:04.297-07:002012-06-08T07:45:04.297-07:00"...it could go and buy up every good in the ..."...it could go and buy up every good in the economy without affecting prices..."<br /><br />Monetary policy is not about printing money and buying goods. Monetary policy is about asset swaps. Even in a liquidity trap, if the government issues debt so it can purchase some goods, and the central bank then swaps outside money for the new government debt, that will indeed raise the price level. The consolidated government has indeed printed money to buy goods, but that is fiscal policy. That's not what we are talking about here. QE involves the Fed issuing reserves to purchase long-term Treasury securities or other assets.<br /><br />"...whereas it can't quickly create more, say gold; so the Fed purchasing gold would raise gold prices."<br /><br />No, in a liquidity trap, if the Fed purchases gold, it does not change the price of gold, just as it will not change the prices of Treasury bonds if it purchases them.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9000043922767175822012-06-07T20:27:40.573-07:002012-06-07T20:27:40.573-07:00What about individual risk aversion?
I'll giv...What about individual risk aversion?<br /><br />I'll give a quick specific: The government buys trillions in 30 year bonds.<br /><br />The current rate is 2.73%.<br /><br />The government starts buying big. This will pressure that rate down, but you say the government can have no effect. So, ceterus paribus, when the rate starts to drop, to 2.72%, parties in the private sector must want to jump in and buy! 2.72% is a bargain.<br /><br />What about heterogeneity of investors? When bonds are 2.73%, then everyone in the market who had a forecast, and level of risk aversion, such that 2.72% was a good deal would have already bought. So there is no one else additional left to jump in when the price drops to 2.72%.<br /><br />But, you may say, when the government buys that changes peoples' forecasts. It makes people think short term rates in the future will be higher, so this urges them to buy when the government pushes the rate down – a perfect information and foresight story, like in Wallace. <br /><br />But what about risk? People rightly don't know their information and foresight is perfect over 30 years, and may be risk averse to go against the government's buying? And if long term rates do drop this can increase the velocity of money, more houses sold with lower payment, projects turn to positive NPV.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-63296145525072285352012-06-07T20:00:53.319-07:002012-06-07T20:00:53.319-07:00Your argument seems to rely on the fact that if th...Your argument seems to rely on the fact that if the Fed. buys long term bonds with reserves, that's something that the private economy could have done if it wanted to, so there must be no effect.<br /><br />You use the MM analogy where a corporation can't improve the well being of shareholders by taking on debt, because if that was good, shareholders would have done it already themselves for their personal portfolios, and it would be equivalent for them. And the shareholders would just un-do what the corporation did in their personal portfolios.<br /><br />I could go through all of the assumption violations that are long accepted in economics and finance to make MM far from true, but there's also the fact that it's all about what's best for individual shareholders, not the economy as a whole.<br /><br />If the government taxes everyone in the sunbelt and buys them solar panels, you could say this will have no effect, because people could have done this themselves (and no new currency was created). But, this is obviously untrue, right. The economy could have done it on its own, but it didn't, and wouldn't. Because individual actors don't fully consider externalities, they can't risk pool like the government (no one can), they can be liquidity constrained, there's asymmetric information,...<br /><br />When an individual or a firm is deciding whether they will buy long-term securities, they don't think about whether it will help the unemployed. This is not a factor, or fully considered, even though it's obviously important for the economy and society as a whole. So individuals will under-do this even if it is better for the economy as a whole. <br /><br />It's not not done by the private sector because it can't help, so the government shouldn't even try. It's not done because personal interest doesn't fully coincide with economy-wide interest; the invisible hand does not fully hold.<br /><br />That the private sector could have done it does not necessesarily mean that the government doing it won't help, or can't have any effect, Q.E.D. You need more than that.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31440576084667738942012-06-07T19:33:57.365-07:002012-06-07T19:33:57.365-07:00Thinking about currency further, I could see the 6...Thinking about currency further, I could see the 6%. I've known a lot of poorer and less educated people. They tend to hold their wealth in currency a lot more. A lot of them are unsure about banks, or they had a checking account that was closed due to overdrafts. And a lot of them owe money and they know bank accounts can be seized, or that's actually happened to them. So, they hold their money in currency. As proof, look at all the check cashing places. A lot of people are paying an arm and a leg so they can have currency instead of electronic bank debits. Sad, but true. Then, you also have the illegal economy running on currency, which influences the legal one.<br /><br />And poorer people have a very high marginal propensity to consume. Increase currency and they start spending a lot more, the velocity of money churns.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-83843235192811648702012-06-07T18:24:23.974-07:002012-06-07T18:24:23.974-07:00I'm trying to understand how this is consisten...I'm trying to understand how this is consistent with the idea that the Fed must be able to raise the price level eventually otherwise it could go and buy up every good in the economy without affecting prices, which is absurd.<br /><br />I thought maybe it's because the private sector can create financial assets "out of thin air" to quickly offset any intermediation the Fed does, whereas it can't quickly create more, say gold; so the Fed purchasing gold would raise gold prices.<br /><br />But then the transmission mechanism for monetary policy you seem to discuss is the idea that the Fed eases by making base money less scarce relative to other safe assets, so purchasing any amount of goods and services won't decrease the scarcity of base money and shouldn't be able to raise prices.<br /><br />Any help would be appreciated.Robertnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-3118795249278567592012-06-07T07:43:31.799-07:002012-06-07T07:43:31.799-07:00> It's convenient to think that there is a ...> It's convenient to think that there is a channel in both. In the floor system, though, the channel is set in such a way that the lower bound (the interest rate on reserves) determines the overnight rate... It should have disappeared, except for the quirk in the system whereby GSEs do not get interest on their reserve accounts. I think that essentially all overnight lending is done by GSEs so they can get some interest on their reserve balances.<br /><br />Ah! I see. This reminds me of http://www.econbrowser.com/archives/2008/11/the_new_improve.html [referenced recently on Sumner's blog].<br /><br />Banks are willing to pay up to 1 percent (the "interest on reserves" rate) for this. Since FDIC insurance costs 0.75 percent, they are willing to pay the GSEs up to 0.25.<br /><br />> Yes, financial institutions could be lending and borrowing among themselves overnight, but typically the quantity of reserves held with the central bank overnight is essentially zero.<br /><br />Fantastic! I've never really thought carefully about this until now, but it makes thinking about this a bit easier.marrishttps://www.blogger.com/profile/07508519250212893577noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65574691612307473592012-06-07T07:35:51.418-07:002012-06-07T07:35:51.418-07:00Ted,
That would seem to imply lump-sum taxation. ...Ted,<br /><br />That would seem to imply lump-sum taxation. If proportional taxes are levied on income and income differs across individuals, then the policy would have a distributional effect. If the policy has distributional effects, then we know that it has real effects.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35420650667886577622012-06-07T07:34:44.748-07:002012-06-07T07:34:44.748-07:001. That's just the usual money multiplier stor...1. That's just the usual money multiplier story. Pretty much irrelevant even before the financial crisis. There may still be reserve requirements in the US, but they don't matter (didn't matter) much.<br /><br />"why would people hold so much of their money in paper"<br /><br />Why indeed? But they do. About 6% of US annual GDP. That's a lot of currency. Even if about half of this is held abroad, it's still a lot of currency per US resident held within US borders. Everyone is not like you apparently.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31628756549795127972012-06-07T07:30:53.801-07:002012-06-07T07:30:53.801-07:00I'm saying that it's obvious that, under a...I'm saying that it's obvious that, under a floor system, OMOs in short-term debt are irrelevant. What is less obvious, is that OMOs in long-term debt are also irrelevant, which is the general point here.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70380969517439493942012-06-06T21:48:34.890-07:002012-06-06T21:48:34.890-07:00On my phone. Not sure how the word chinese got in...On my phone. Not sure how the word chinese got in my post. Should be inflationCharlie Clarkehttps://www.blogger.com/profile/02079017903923824877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81032499827671383512012-06-06T21:46:33.416-07:002012-06-06T21:46:33.416-07:00You acknowledge that Fed policy works through expe...You acknowledge that Fed policy works through expectations in this comment, yet you also say this, " Under current circumstances, there are no actions the Fed can take that could necessarily achieve such an outcome. Indeed, it is possible that the Fed could promise to keep the policy rate at 0.25% for five years in the future, and NGDP growth could fall below the target."<br /><br />That seems contradictory, if there's nothing the Fed can do, expectations shouldn't matter.<br /><br />Bernanke has said over and over he won't change the inflation target. If instead he said, the fed will target three years of 4%the inflation, 1 year of 3%, and then return to our 2%Chinese trend. We will target this price level path, making up for past mistakes.<br /><br />Your view is nothing would happen, correct?Charlie Clarkehttps://www.blogger.com/profile/02079017903923824877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32556505877011138032012-06-06T17:20:51.391-07:002012-06-06T17:20:51.391-07:00"Remember that, in a channel system, overnigh..."Remember that, in a channel system, overnight reserve balances are zero."<br /><br />1) But, in the US system, long before the liquidity trap we've had required reserves. Excess reserves were zero, but not required reserves. As I've learned this, and as I've seen this taught many places, when the Fed creates new money and buys securities, that money reverberates through the system, getting deposited in banks, then the banks put the required percentage in reserves, and loan out the rest, and then that ends up in banks which puts the required percentage in reserves and loans out the rest, and so on, until the whole thing ends up in reserves in the end (all as required reserves). <br /><br />2) Even if there were no required reserves, why would people hold so much of their money in paper with dead presidents (unless you're a drug dealer)? My wealth is vastly greater than when I was young, but I hold no more currency (in real terms). There's no reason to ever hold more than the small convenience amount. Why hold additional money in paper that's bulky and can get stolen, when I can have it held electronically as reserves? Why incur the extra storage costs and risks when you get extra money? Why not keep the extra at the Fed electronically instead? Why would not one party put even one cent there, instead of the entire increased amount going to more currency?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79985183624143199752012-06-06T17:20:36.668-07:002012-06-06T17:20:36.668-07:00"An open market operation in short-term gover..."An open market operation in short-term government debt in a floor system will have no effect, at the margin, as the central bank is simply swapping one interest-bearing short-term asset for another."<br /><br />and<br /><br />"Under a floor system, we are effectively in a perpetual liquidity trap. Conventional open market operations in short-term government debt do not matter"<br /><br />So if open market operations are in long-term debt, or even equities, then they matter?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1045946744514057342012-06-06T15:04:41.194-07:002012-06-06T15:04:41.194-07:00"Is the key point that there *is a channel* i..."Is the key point that there *is a channel* in one system and *no channel* in the other system?"<br /><br />It's convenient to think that there is a channel in both. In the floor system, though, the channel is set in such a way that the lower bound (the interest rate on reserves) determines the overnight rate.<br /><br />"If so, then it seems that the overnight lending market will disappear."<br /><br />It should have disappeared, except for the quirk in the system whereby GSEs do not get interest on their reserve accounts. I think that essentially all overnight lending is done by GSEs so they can get some interest on their reserve balances.<br /><br />"Won't it still be profitable to lend to consumers at higher rates?"<br /><br />You might think so. But apparently banks are thinking this is a bad bet. Also some banks are capital constrained, but I'm not sure how important that is.<br /><br />"whether or not there are excess reserves kept at the central bank (CB)"<br /><br />Yes, in the floor system there are excess reserves held overnight.<br /><br />"whether or not there is interest on such reserves"<br /><br />No, that doesn't matter. You can have a channel system where the interest rate on reserves is zero, or a floor system where the overnight rate is zero.<br /><br />"Are banks with excess reserves lending the full excess to other banks?"<br /><br />Yes, financial institutions could be lending and borrowing among themselves overnight, but typically the quantity of reserves held with the central bank overnight is essentially zero.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-50262631558063701672012-06-06T14:55:06.290-07:002012-06-06T14:55:06.290-07:001. Here's something I wrote on NGDP targeting:...1. Here's something I wrote on NGDP targeting:<br /><br />http://newmonetarism.blogspot.fr/2011/10/nominal-gdp-targeting.html<br /><br />2. "I used to think he was just a Righty..."<br /><br />My neighbors think of me as just another Lefty.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11163355593691433802012-06-06T14:29:38.053-07:002012-06-06T14:29:38.053-07:00I think this article is saying something important...I think this article is saying something important, but I'm not sure I understand it. Is the key point that there *is a channel* in one system and *no channel* in the other system?<br /><br />Further, does the existence of the channel depend on<br /><br />(1) whether or not there are excess reserves kept at the central bank (CB)<br />(2) or, whether or not there is interest on such reserves<br /><br />?<br /><br />What exactly happens overnight in the Canada system? Are banks with excess reserves lending the full excess to other banks? I think you're saying that the channel lower bound is controlled by interest on CB reserves (no bank would lend to another bank for less than this amount). The upper bound is controlled by the discount rate (no bank would borrow for more than this rate). Is this accurate?<br /><br />Now what has happened in the US to remove this channel? Has the upper bound (the discount rate) fallen to match the lower bound (IROR)? If so, then it seems that the overnight lending market will disappear. Further, it seems that QE will not improve the interbank lending market, since the channel bounds have collapsed.<br /><br />However, what does this have to do with the liquidity trap which [I've always assumed] is related to bank lending to *non-banks* ? Won't it still be profitable to lend to consumers at higher rates?marrishttps://www.blogger.com/profile/07508519250212893577noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-4408655595006590942012-06-06T13:34:16.894-07:002012-06-06T13:34:16.894-07:00what do you mean "liquidity trap"?
do y...what do you mean "liquidity trap"?<br /><br />do you mean "qe is ineffective"? do you mean "monetary policy is ineffective" do you mean "some kinds or channels of monetary policy are ineffective"? <br /><br />PK likes to say we are in a liq. trap but how is that possible since we know physically printing money or minting coins to payoff the national debt must be inflationary? maybe we are just in a policy trap and unwilling to undertake monetary policy that would work? or maybe QE works we just have not read the instructions?dwbnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57223528121691224662012-06-06T11:59:31.835-07:002012-06-06T11:59:31.835-07:00Thanks for some civility different Anon. I wasn...Thanks for some civility different Anon. I wasn't trying to insult Steve-I said I used to think he was just a Righty. I have after learned there's more to him.<br /> <br /> I was honestly curious whether he has heard of Sumner's NGDP targeting idea-I of course presume he has-and what he might think of it. <br /><br /> As it sounds like he believes in the liquidity trap.Mike Saxhttps://www.blogger.com/profile/01360689916550576484noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51204882851240154042012-06-06T10:53:31.499-07:002012-06-06T10:53:31.499-07:00Steve
I think the chap 10 stuff in Bruce C. and S...Steve<br /><br />I think the chap 10 stuff in Bruce C. and Scott F.'s textbook is a pretty elegant way to explain why open market operations are sterilized when the IROR equals the overnight rate. May save you some effort trying to explain this to non-money folks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-92212010440405293842012-06-06T10:26:20.386-07:002012-06-06T10:26:20.386-07:00"If he thinks QE doesn’t work, how does he ex..."If he thinks QE doesn’t work, how does he explain the huge impact of rumors of QE on the asset markets?"<br />I asked the same question above, <a href="http://newmonetarism.blogspot.com/2012/06/more-on-unconventional-open-market.html?showComment=1338827288176#c4202747412226869111" rel="nofollow">here</a> is Steve's response.<br /><br />"If Williamson believes in liquidity traps, why in the world does he call himself a “monetarist?” Not believing in liquidity traps is pretty much the definition of monetarism."<br />Post-Keynesians complain that Neo/New Keynesians (who stole their rightful name!) aren't really Keynesians. So maybe "New" means "not". I think Buchanan's "New Institutionalist" economics has hardly reflected the old "Institutionalist" school of Veblen & Galbraith.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-67395419067616928452012-06-06T09:11:38.280-07:002012-06-06T09:11:38.280-07:00Different Anon here,
Steve is a registered democr...Different Anon here,<br /><br />Steve is a registered democrat, but doesn't like Krugman's playground insults and self-aggrandizement. Don't assume he's a conservative because he wants economists to act like grown ups towards each other.Anonymousnoreply@blogger.com